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The House of Lords has ruled in favour of Arctic Systems and rejected HMRC's attempts to impose the so-called married couples' business tax - Section 660 - on tens of thousands of small businesses.
HMRC had used an old piece of legislation, Section 660, to argue that the dividends paid to one partner were really earned and belonged to the major fee earning partner, a higher rate tax payer. It is a business structure used by thousands of married couples who jointly own a small business in which one partner is the major fee earner.
The uncertainty has left thousands of businesses concerned that they too could face tax demands of up to £40,000 - even though many were advised to structure their businesses in that way.
Arctic
About five years ago, Geoff and Diana Jones, who own Arctic Systems, became the flag bearers for married couples in business together, when a tax demand for £42,000 dropped through their letter box. With the support of several small businesses organisations including the Professional Contractors Group (PCG), they fought their case through the legal system.
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Geoff Jones said: “Diana and I are delighted that the Law Lords have vindicated our position, and confirmed that we have done nothing wrong.
"This has been a terrible ordeal for us, which looked like it could cost us our home at one point. We’re relieved it’s all over, but I am still extremely angry that the Government tried to pull this stunt in the first place.”
Assurances
Although, HMRC appealed the decision to the House of Lords, they did not accept that the case was in the public interest and had 'test case status' - which would have meant that the Government bore the costs.
PCG will now be seeking assurances from the Government that today’s judgment marks the end of the matter and that small businesses’ tax treatments will not be altered in this respect.
PCG says it has taken legal advice on the possibility of HMRC taking the matter to a European court, and has been advised that this is not possible. It believes that this therefore represents the final judgment in the Arctic Systems case.
Further information
Shout99 has written two articles summarising the events relating to Section 660:
You can also read more about the background and the issues at stake in Shout99's Section 660 resource centre
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The Editor
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